Answered: (A) what does the measure price…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Related questions

Question

(A) what does the measure price elasticity of demand mean?
(b) how is it calculated?
(c) if you want to increase revenue for a product with a price elasticity of demand of 1.5, what should you do with its price?

Expert Solution

Step 1

Answer:

(a). Price elasticity of demand: price elasticity of demand measures the sensitivity of quantity demanded with respect to price. In other words, it measures the percentage change in the quantity demanded when the price changes by 1%.

(b). The formula to calculate the price elasticity of demand is given below:

$E_{p} = \frac{p e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d}{p e r c e n t a g e c h n a g e i n p r i c e} o r E_{p} = \frac{Q_{2} - Q_{1}}{P_{2} - P_{1}} \times \frac{P_{1}}{Q_{1}} W h e r e, Q_{1} = I n i t i a l q u a n t i t y Q_{2} = N e w q u a n t i t y P_{1} = I n i t i a l p r i c e P_{2} = N e w p r i c e$